Today we’re taking a little side path into the gold markets, since gold has recently shown a little spike of enthusiasm following talk of bailouts, and we’ve gotten a bunch of questions about Gerardo Del Real’s “Tier 2 Gold” teaser pitch for Junior Mining Monthly ($99/yr).
So what is he talking about? Well, like most junior mining letters he’ll start out with a big push for gold in general, pointing out the need for gold’s stability in a world of zero interest rates and falling currencies, but he’s also got this notion of “Tier 2 Gold” that he says is so much cheaper than other kinds of gold. Here’s a little taste of that:
“Insiders call it ‘Tier 2 Gold.’
“And it comes from the world’s secret emergency reserves.
“These stockpiles aren’t listed on the books of any central bank. You won’t find any of it in Fort Knox. It’s secured in ‘deep vaults’ around the world.
“If you live in a state like Nevada or Colorado — I guarantee several million ounces are locked away within driving distance of your house.
“And, thanks to a little-known industry loophole…
“You can buy Tier 2 Gold for as little as $12… $15… or $23 per ounce.”
OK, so that’s not a “loophole” — that’s mining, one of the oldest industries on earth, and the only one that can conjure up dreams of alchemy, taking acres of boring-looking land and turning it into gold. And it’s not new that gold projects are valued at less than the “what if we could turn all that gold buried in this rock into gold coins right now” price those ounces would be worth in the real world — of course they are.
Gold is EXPENSIVE to mine, you’ve got to spend years (decades sometimes) finding it, plotting out how much there is and exactly where it is so you can plan to mine it effectively, and then you’ve got to spend huge amounts of money digging up tons of dirt and rock, crushing them to extract the small amount of gold hidden in there, then purifying and melting it down. All using a giant factory that you built, using huge piles of borrowed money and investor capital, maybe hundreds of miles from civilization and partially hundreds of feet below ground.
But I’ll save some of that high horse lecturing for later — don’t worry, we’ll get back to it. Del Real does eventually reveal that yes, this is mining…
“…yes the gold IS underground.
“But it’s not in some hardened top-secret bunker.
“It’s literally IN the ground.
“Because Tier 2 Gold represents the thousands of tonnes of proven gold reserves sitting undeveloped around the world.
“At low gold prices… these assets stay cheap.
“But when gold prices explode…
“Their value moves higher further and faster than practically any investment you’ll ever see.”
True, but that doesn’t mean the value of that gold in the ground goes from $8 to $1,600 — the market might get more excited about it, but that much more likely to mean going from $8 to $20 or $30 or even $100 as the mine gets bigger or better or achieves major milestones in development and financing (and along the way, that asset will probably be shared among ever larger numbers of shares outstanding — since making that project more valuable takes a lot of work, which takes money, which means they’ll sell more shares to raise that money).
Still, if you get the timing right junior gold projects can present tremendous leverage to the gold price, rising hundreds and sometimes thousands of percent if sentiment shifts for a bit and everyone gets excited about gold again — like January-June of 2016, when gold went up by about 25%, the average huge mining stock went up by more than 100%, and lots of the smaller junior gold names went up by 500-1,000% — so we all dream of occasionally hitting those well-timed breakouts.
And, naturally, the ad hints that fearless editor Gerardo Del Real has got it timed… and that this time it’s going to be driven by bond prices and institutional investors… here’s an excerpt of his projection from the ad:
“How do I know we’ll hit the breaking point in as soon as the next 90 days?Are you getting our free Daily Update
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“Simple. Because I know the exact event that will trigger it.
“Ask yourself this: who owns the world’s bonds? The $100 trillion in assets that are the real backbone of the global financial system…
“Trillions of dollars bigger than the stock market.
“Pension funds. Insurance companies. Regional banks.
“They don’t own low- or negative-yield assets because they like losing money.
“They’re literally required to hold them….
“But they won’t eat multibillion-dollar losses forever. Their shareholders and investors won’t let them. Eventually, they’ll be forced to change the rules.
“That’s when the fireworks will begin.
“Trillions in bonds will get dumped, literally overnight.
“Central banks will jump in to backstop the market — printing trillions more.
“And all those institutional investors? They’ll reinvest.
“Most of it will probably wind up in U.S. stocks.
“But a significant chunk will land in gold.”
Then we get into what impact that will have on the gold price…
“The world’s total annual gold production is just 3,200 tonnes…
“Or just $155 billion worth of gold.
“Even if 1% of the $15 trillion in negative-interest securities shifted into gold… it would buy up the entire annual supply.
“And, I think the number will be substantially larger.
“That’s why $5,000 or $10,000 gold isn’t a ‘blue sky’ scenario.
“It’s the base case for when the crisis hits.”
That’s when we get into some reason for concern — when we see a clear forecast from someone who says they know exactly when the world economic system will turn on a dime and begin moving in a new direction. Del Real does not know, any more than you or I, whether investment rules at pension funds will change… or whether those funds will reject bonds and buy gold. He makes a logical argument, but when you’re not looking at the full picture of the world and just pull out a few numbers, it’s very easy to make any argument sound logical… particularly if you’re speaking to someone who doesn’t do advanced economic modeling or work in unpredictable systems.
We all want to think that these things are predictable and logical and easy to make money from, that’s why it was so appealing when Jim Rickards teased his many newsletters over the past several years with a promise that it was a “mathematical certainty” that we’d be returning to a gold standard of some sort, and that the only price for gold that made sense in his forecast was precisely $10,000. It sounded good and logical, and delightfully simple, and we’re always impressed by math, but that doesn’t mean it’s necessarily more reliable than reading your squirrel entrails or the sludge in the bottom of your teacup.
But anyway, the real meat of this ad is not the idea that gold will go to $5,000… it’s that Gerardo Del Real says he has some great stocks to suggest for that world. And, of course, those are top-secret ideas for his subscribers… so let’s see if we can ID them from the clues, shall we?
“CODE NAME: Pay Dirt
“Our first play just hit pay dirt on all three holes during Phase II drilling at its Idaho project.
“This property already has a two-million-ounce deposit.
“That’s nearly $3 billion worth of Tier 2 Gold.
“The site was once a producing mine. Over 600,000 ounces have been pulled from it.
“When gold prices fell under $300 in 2000, it was shuttered.
“And, guess what? The best targets are still in the ground. Drilling has identified a 21-meter stretch of 4.55 grams per ton gold.
“There’s another 70 meter stretch of 2.35 grams per ton….
“It could soon be an active mine again. Based on its current market cap, with 2 million ounces in the ground — you’re basically buying this Tier 2 Gold for $17 an ounce.”
Thinkolator says this one is slightly out of date, but that’s Revival Gold (RVG.V in Canada, RVLGF OTC in the US), which was teased by Frank Curzio last Fall as well (though I didn’t write about it at the time)… as is a pretty popular activity in the mining world, an executive from one of the large companies went off on his own to try to build up a new company by restarting an old mine. Though really, the mine was shut down so long ago, more than 20 years now, that it’s more like just getting a head start on the exploration for a new project than “restarting” anything.
You can see Revival’s latest investor presentation here, they’re hoping to advance two projects they’ve acquired, Beartrack and Arnett, and they’re now treating them as one potential project (they’re about four miles apart). They do not have any reserves, but they have identified some high-grade areas of gold in the ground from their drilling, and they’ve increased their indicated and inferred resources so those now total close to three million ounces.
It’s very important to keep in mind that indicated and inferred resources are not at all the same as proven reserves. There’s a continuum of “quality” for minerals in the earth, based on how much drilling and analysis has been done — so an inferred resource is something that you think is probably there in something like a commercially viable quantity, based on initial drilling and some geological understanding of the area. Proven reserves, at the other end, are the result of a lot more drilling to more specifically define what’s underground, with something closer to certainty (though still a ways off — it’s still under ground, after all, and drilling can only show you so much), and proven reserves also come with an economic assessment — not just that the mineral is there, and you’re pretty sure how much is there, but that there’s also reason to believe that you can produce that mineral using defined mining methods and within economic parameters that make real world sense. It takes time and a lot of drilling and geological work to move from “we found gold” to “I think it’s this much gold” to “we’re really sure there’s at least this much gold” to, finally, “I can promise the bank that we’ll be able to produce this much gold at a profit and repay our construction loans.”
Here’s a useful chart that I lifted from New Pacific Metals that might help the visual learners…
Their “updated resource” now has almost exactly three million ounces of resources, split roughly evenly between indicated and inferred resources, with some history and geological analysis that indicates there could be lots more “mineralized” land in their mostly unexplored claim areas, with the deposits they know about being still “open” along strike and at depth (which just means they haven’t clearly found the “end” of the deposit areas yet, so there might be more to find).
And if you’d like confirmation of the match, those drill results that the ad hints at come straight from a press release headline from last summer.
As I type, Revival has a market cap of about US$18 million, so if you want to use that “cost per ounce” metric, spurious though it may be for an early stage company like this, the collapse in the share price means you’re paying about $6 an ounce for those indicated and inferred resources. They indicate that later this year they’ll probably do a preliminary economic analysis for restarting the heap leach pad, which I assume means processing some of the old mining waste on site that didn’t get produced when gold was at $300 an ounce 20 years ago, and will do some more planning for the permitting that will have to get underway, but the next big bit of info would presumably be a preliminary economic analysis for a larger project — and all we know about that is an entry in their presentation that says “20,000 tpd Mill Project PEA?” in 2021.
For now, they’re almost out of money (a common circumstance for junior mining stocks), so they’ve been in the process, for the past several weeks, of trying to offer up to C$5 million worth of shares though a marketed public offering to continue to fund their project development.
Those shares were supposed to be offered at C$0.68 a share, right around where the stock was on March 5 when they started the process, so even though they also include half of a 2-year warrant to buy the stock at C$0.90 there wasn’t really an interest thanks to the collapse in the share price (it dropped about 30-40%, along with pretty much everything else). That led to them pulling the offer today, issuing a press release about slowing down activity to cut costs (“Revival Gold has taken steps to minimize cash expenditures and tighten budgets for the foreseeable future”), and replacing that C$5 million offer with a non-brokered private placement of only one million dollars at below-market prices (40 cents a share). That would keep the company going for a while, I assume, but only if they don’t really do any work — so I’d assume that anything you’re imagining about the future results from Revival should be delayed, the PEA for the heap leach project will probably be later, any further drilling will probably take longer than anticipated, etc.
The good thing, I guess, is that the gold is still there (probably, we have to say, since these are resources and not proven reserves), and if gold prices surge they almost always take essentially all viable junior mining projects higher with them… even if they’re years away from even committing to build a mine, let alone earning anything from it. I would imagine that any persistent strength in gold will help the shares, and that if today’s optimism bleeds through into better investor sentiment at some point in the coming few months, they’ll probably be back to raise a larger amount of money and get some more of the work going again, but that’s all guesswork — for now, they seem to be hunkering down and making sure they don’t really run out of money before they have a chance to move the project forward.
Incidentally, this isn’t the first foray into “Idaho gold” for the Angel Publishing folks — Nick Hodge, if you recall, was saying similar things about the inevitability of gold’s rise and the huge reserve potential of America’s “unknown” largest gold mine in touting Midas Gold starting a couple years ago, in ads that ran for months and months — and despite the fact that it’s a much larger project, and is much further along, that one’s still a sub-$100 million company, too, and those who bought just as those ads started rolling have seen their investment drop 50% in value despite the fact that the gold price is now 20% higher than it was then. There are no guarantees in this little sector, but there are always lots of appealing-sounding stories.
“CODE NAME: American Prime
“These guys have an estimated 4.4 million ounces of gold at their property in Mexico.
“They have a $60 million market cap right now.
“Buying this stock is like picking up gold at $13.60 per ounce.
“That’s like trading two coffees for an ounce of gold!
“It gets better. With a feasibility study filed and permitting underway… this project is set to become a mine.
“Once the gold is out of the ground… they’ll get every penny of the $1,600 spot price.”
Well, no, they won’t get every penny of the spot price — they’ll get the profit. Yes, technically the sale of each ounce will hit their revenue line at the full price, but that’s only after they’ve spent the $1,000 or so per ounce that it will take (on average) to operate and finance the mine.
But sadly, I haven’t yet identified which one this might be. I do know that Del Real has spoken positively about Almaden Minerals (AAU, AMM.TO) in the past, with their Ixtaca deposit, and they were at roughly a $60 million market cap a couple months ago (down to $30 million now)… but their resource and reserves base so far is only about 2.5 million ounces, I think, not a match for that 4.4 million number. Incidentally, they also had to pull and revise a private placement fundraising last week… junior miners always need money, and this hit to share prices came at a rough time for some of them.
So that’s a similar kind of stock to what’s being teased, but we can’t name this one just yet… perhaps you’ll have a thought about who it might be to match those numbers with a gold project in Mexico.
We can follow up on that ” gold in the ground” valuation idea a little, though, to try to “cool your jets” in a different way.
So just by way of comparison, SSR Mining’s (SSRM) primary project is the Marigold Mine, and with that and some othero production assets they have about 4.4 million ounces of gold reserves and are producing more than 400,000 ounces a year (ignoring, for the moment, 50 million ounces in silver reserves that would add another million ounces of “gold equivalent”). That leads to about $600 million in revenue and a little less than $60 million in profits per year, and the company is valued based on those metrics, with some credit for their non-producing projects and the potential that they can replace Marigold with other large projects eventually (or extend the mine) when the reserves run dry, at a current market cap of about $1.6 billion. That’s obviously a more sustainable operation, with real profitability, but even SSRM is valued at “only” about $300 per ounce of gold equivalent reserves, not counting resources. The measured, indicated and inferred resources at SSRM would total up to almost exactly 25 million ounces, so if we include those with the reserves that means SSRM, a established company with several producing assets and a lot of financial flexibility, is valued at something like $50 per ounce “in the ground.”
SSRM is not at all a company I’ve studied, by the way, though we’ve certainly seen it teased over the years (it used to be called Silver Standard Resources, in case that rings a bell)… it’s just a company whose materials I came across recently, so it was easy to use as a comparison — I don’t own it and don’t know if it’s relatively good or bad. I just wanted to point out that $50 per ounce “in the ground” is seen by the market, at least in this example, as a relatively reasonable price for an established project that’s actually making money, so don’t get too hung up on whether those “in the ground” ounces are worth $5 or $30 or $50 or $100… each project has to be assessed on its own merits, most mineral discoveries will never turn into a mine, and during times of uncertainty it’s extra important to think about the timeline (and cost) of mineral development from discovery to resource statements to preliminary economic analysis to further drilling and finally feasibility studies, mine financing, and the actual beginning of mine construction. That all takes a long time and a surprising amount of money, so a “core competency” for a mining company is the ability to pulbicize itself, attract investment newsletters and analysts, and sell their ideas to investors so that they can regularly raise